Hedge Funds Are Cashing Out Of Evoqua Water Technologies Corp. (AQUA)

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Evoqua Water Technologies Corp. (NYSE:AQUA).

Evoqua Water Technologies Corp. (NYSE:AQUA) investors should be aware of a decrease in support from the world’s most elite money managers of late. Evoqua Water Technologies Corp. (NYSE:AQUA) was in 22 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 28. There were 23 hedge funds in our database with AQUA positions at the end of the first quarter. Our calculations also showed that AQUA isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 79 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

Paul Marshall of Marshall Wace

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind we’re going to view the recent hedge fund action encompassing Evoqua Water Technologies Corp. (NYSE:AQUA).

Do Hedge Funds Think AQUA Is A Good Stock To Buy Now?

Heading into the third quarter of 2021, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -4% from one quarter earlier. By comparison, 17 hedge funds held shares or bullish call options in AQUA a year ago. With hedge funds’ sentiment swirling, there exists a few notable hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

Among these funds, Impax Asset Management held the most valuable stake in Evoqua Water Technologies Corp. (NYSE:AQUA), which was worth $151.7 million at the end of the second quarter. On the second spot was P2 Capital Partners which amassed $86.3 million worth of shares. Alyeska Investment Group, Adage Capital Management, and Citadel Investment Group were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position P2 Capital Partners allocated the biggest weight to Evoqua Water Technologies Corp. (NYSE:AQUA), around 6.47% of its 13F portfolio. Impax Asset Management is also relatively very bullish on the stock, setting aside 0.67 percent of its 13F equity portfolio to AQUA.

Seeing as Evoqua Water Technologies Corp. (NYSE:AQUA) has witnessed declining sentiment from the smart money, it’s safe to say that there lies a certain “tier” of hedge funds that slashed their positions entirely by the end of the second quarter. Interestingly, Stuart J. Zimmer’s Zimmer Partners said goodbye to the largest stake of the 750 funds monitored by Insider Monkey, comprising about $24.3 million in stock. Robert Vincent McHugh’s fund, Jade Capital Advisors, also sold off its stock, about $8.9 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 1 funds by the end of the second quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Evoqua Water Technologies Corp. (NYSE:AQUA) but similarly valued. These stocks are SpringWorks Therapeutics, Inc. (NASDAQ:SWTX), LGI Homes Inc (NASDAQ:LGIH), Viavi Solutions Inc (NASDAQ:VIAV), Cerence Inc. (NASDAQ:CRNC), Parsons Corporation (NYSE:PSN), Companhia Energética de Minas Gerais (NYSE:CIG), and Millicom International Cellular S.A. (NASDAQ:TIGO). This group of stocks’ market values are similar to AQUA’s market value.

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As you can see these stocks had an average of 15.9 hedge funds with bullish positions and the average amount invested in these stocks was $288 million. That figure was $400 million in AQUA’s case. Viavi Solutions Inc (NASDAQ:VIAV) is the most popular stock in this table. On the other hand Millicom International Cellular S.A. (NASDAQ:TIGO) is the least popular one with only 7 bullish hedge fund positions. Evoqua Water Technologies Corp. (NYSE:AQUA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AQUA is 71.7. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24% in 2021 through October 22nd and still beat the market by 1.6 percentage points. Hedge funds were also right about betting on AQUA as the stock returned 21.2% since the end of Q2 (through 10/22) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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Disclosure: None. This article was originally published at Insider Monkey.